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Idea of the fortnight: Investing in China
April 28, 2011

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Author : Fundsupermart

 Idea of the fortnight: Investing in China

28 APRIL 2011

Investing in China

Our take:

The Chinese equity market is expected to offer better returns to the investors as not only the economy is growing at a fast rate but also the equity market is currently undervalued but the same cannot be said for the Indian equity market. Investing into China funds will not only get you better returns but will also get geographical diversification benefits.

Why we like China:

1. Global economic growth powerhouse

  • China’s economy is expected to grow at ~9% in 2011, one of the highest in the world

  •  China’s contribution to global growth is expected to be more important amidst the subpar growth in the developed economies

2. A simply way to benefit from RMB revaluation

  • We think the RMB will likely appreciate steadily in the years ahead. The most straightforward way to benefit from RMB’s potential gain is to buy China equity funds

  •  The reason is Chinese assets will be re-valued on the rising RMB

  • Furthermore, Chinese companies’ corporate earnings will be adjusted higher when they are translated into foreign currencies

3. Big banks strong earnings may bode well for the stock market

  • BOC and CCB, two of the largest Chinese State Owned Banks reported solid results for 2010. Earnings for BOC and CCB posted record high earnings which were up 29% and 26% respectively

  • The significant net interest income growth in 4Q10 (PBOC started to hike rates in October 2010) suggests that banks will likely be benefited from rate-hike cycle. Therefore, we remain optimistic on their earnings this year

  •  Since Chinese banks are heavily weighted in the HSCEI and the Shanghai A Share Index, their solid results suggest there is likely to have little downside risk (given less than 2X P/B compressed valuation) despite lack of specific catalysts

  • We will keep an eye on the changes in asset quality which may become more visible in 1Q11 results. Any upside surprises will likely produce positive re-ratings

4. Attractive valuation

  • Both A-share and Hong Kong listed Chinese equities are trading well below the historical mean

  •  As at 28 March 2011, the estimated PE for the Hang Seng Mainland 100 Index is at 11.1X and 9.6X for 2011 and 2012. Estimated earnings growth is at 15.8% and 15.7% for 2011 and 2012

  • The estimated PE for CSI 300 Index is at 13.7X and 11.6X for 2011 and 2012. Estimated earnings growth is at 22.6% and 18.4% for 2011 and 2012.

Related fund

Mirae Asset China Advantage fund

Mirae Asset China Advantage fund is one of the few funds that are available in India that are completely focused on investing into companies in China and Hong Kong. It is a fund of funds and invests the fund corpus mainly into the offshore fund i.e. Mirae Asset China Sector Leader Equity fund. As of 31 March 2011, the Mirae Asset China Advantage Fund has invested 98.64% of the corpus into the offshore fund.
The fund was launched in India on 5th November 2009. The Mirae China Advantage fund has not only outperformed the MSCI China Index (in INR), it has also outperformed Hang Seng Mainland 100 Index. The chart below shows the outperformance of the Mirae Asset China Advantage fund with respect to MSCI China Index and Hang Seng Mainland 100 Index.

Chart 1: Performance of Mirae Asset China Advantage fund with other major China Indices

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